IMF sees negative growth for Cyprus; “Time is up for fiscal measures”

Cyprus urgently needs to contain its public sector wages and freeze all other benefits as it faces a negative growth rate of minus 1% next year, contracting from the flat rate projected for this year, IMF officials said on Wednesday.
Furthermore, a potential facility of 2.5 bln euros from Russia, repayable in four years, will only prolong the situation of deteriorating public finances, the IMF said at the end of its 11-day mission to the island.
“The government has set ambitious targets that would deliver a large reduction in the deficit in 2012 and a balanced budget within three years,” Wes McGrew, head of mission, told a media briefing.
He said that “reducing the deficit of some 7% of GDP in 2011 is needed to halt the rapid increase in public debt, adding that the first package of measures passed in August “were an encouraging first step … in particular the introduction of contributions by public sector employees towards their pensions.”
The IMF sees a higher deficit of 4% of GDP for 2012, far greater than the 2.3% predicted by the government.
The public pension system to which private sector and civil servants contribute already has a small deficit, but over the years, as the system matures and the population ages, this deficit could grow out of hand, he added.
McGrew said in his summary that additional measures “should comprise actions to contain public sector wages and benefits, such as a freeze of the cost of living allowance (COLA) … and an increase in the value added tax rate to 17%.”
Asked by the Financial Mirror if the IMF mission has received any assurances of implementation of tougher fiscal measures, deputy head of mission Eric Van de Vrijer said that “this time action must be taken. There is no room for manoeuvre to wait.”
“Cyprus needs to reduce its deficit fast and significantly in order for the markets to regain confidence and resume lending money,” de Vrijer said, adding that “the fact that the government cannot access the capital markets is very serious and the risks to the banking sector compound that. The first priority for Cyprus is to do all it can to avoid that these problems get out of hand.”
He added that that the passage of a second package of measures being negotiated by the government “is appropriate. If not, financing gaps will become larger.”
De Vrijer explained that Cyprus is a small economy with a very big banking sector, estimated at eight times GDP. Public finances and the banking sector are the IMF’s main concerns, he said, although other contributors such as tourism and shipping will not be enough to support the economy.
Prior to the deadly blast at the Mari naval base in July that knocked out the island’s main power station and paralysed the economy, the forecast had been for a 1.5% growth rate in 2011 and 2.5% in 2012, while reducing public sector deficit to 0% of GDP.